No doubt, IPOs can be quite volatile. But as for Tilray’s (NASDAQ:TLRY) offering — which hit the markets in July 2018 — the moves have been much more extreme than a typical deal. TLRY stock hit a nosebleed $150 by October — that’s ignoring the crazy one-day run up to $300. But since then, there has has been a flood of selling. Now TLRY stock is at $73.
But those who got shares in the IPO are still in the money in a big way. Consider that the initial offering price of TLRY stock was $17.
In a way, the cannabis market is similar to what happened with the dot-com boom in the late 1990s, as investors wanted to invest in the “next big thing.” This means high levels of volatility because of it can be challenging to gauge a market in the early phases.
So what does this mean for TLRY stock? Might the drop-off in the share price be an opportunity?
Well, the company does have some notable positives. An essential part of the strategy is to develop a wide assortment of premium brands. Part of this has been due to a focus on creating medical cannabis products.
Tilray has also been aggressive in putting deals together to license brands, such as from Authentic Brands Group. The company has more than 50 brands and over 4,500 freestanding stores and shop-in-shops.
The focus on the premium side of the market should allow for sustainable margins. After all, as time goes by, the supply in the cannabis market could reach saturation levels — which could drive down prices.
But there are some other advantages for Tilray stock. For example, the company has a burgeoning global footprint. Consider that Tilray already has distributes products in 12 countries across five continents.
Next, the company has been making smart acquisitions, such as for Manitoba Harvest (it is the world’s largest hemp food maker). So yes, with the passage of the farm bill in the US — which legalized CBD ingredients from cannabis — the market could be poised for strong growth. True, there are still requirements with the FDA. But with Tilray’s capabilities in the medical industry, this should not be a huge issue.
The Risks of Tilray Stock
Wall Street is fairly bullish on Tilray stock, with the average price target at $117. But there are some dissenters.
Just look at the analysts at Jefferies & Co. They recently initiated coverage on TLRY stock with an “underperform” rating and a $61 price target. This assumes 16% downside from current levels.
So why the pessimism? The Jefferies research note provided a laundry list of reasons:
- The valuation is out-of-line of the peers for Tilray stock.
- The IP (Intellectual Property) potential may not be as strong as assumed
- Tilray’s market share is not particularly strong in the Canadian recreational category. It’s not even among the top four.
- The partnership deals, such as with Anheuser Busch Inbev (NYSE:BUD), are relatively small and experimental.
- The Authentic Brands Group deal may not be a good move and appears too expensive.
Now all these should give investors in Tilray stock some pause. Although, I think the biggest risks include the market share size and the uncertainties regarding the IP. Both of these are critical for the growth story.
Bottom Line on Tilray Stock
Regardless of the problems with Tilray, the company is still a top-notch player in the industry. But then again, I still think there are even better options for investors. The two that stand out for me include Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC). These companies have strong platforms, experienced management teams and large market shares. They have also raised billions of dollars from mega companies like Constellation Brands (NYSE:STZ) and Altria Group (NYSE:MO).
And I think a key for success in the cannabis market is having a massive balance sheet. But unfortunately, as for Tilray, it has yet to strike a major partnership — which I think will limit the potential upside.
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
